Aubrey McClendon’s Legacy

American trailblazer felled by excess leverage, lawlessness

There is, of course, a terrible tragedy in the death of Aubrey McClendon on Wednesday, but there also is something larger. Inside the life and business that McClendon built is the ultimate personification of the U.S. shale oil and gas boom and current bust. In retelling some of the highlights of McClendon’s career we see not only the great American spirit of entrepreneurship and progress, but also the enormous excesses and lawless behavior that has characterized independent U.S. oil and gas in the last decade and a half that has contributed to the current decimation we’re seeing today.

Aubrey was a pioneer in harnessing the fracking technology invented by George Mitchell and building Chesapeake Energy (CHK) from the ground up with partner Tom Ward (later of Sandridge Energy (SD), and first tasted the power of the capital markets with the public offering of Chesapeake shares in 1993.

McClendon was fast in harnessing the leverage that was becoming more plentiful towards start-up energy companies to continue to buy up acreage and grow Chesapeake at a reckless and alarming rate – but with natural gas prices soaring in the late 1990’s and early 2000’s, it seemed to be only smart to continue to increase production (and Chesapeake share price) as rapidly as the capital markets would allow it. But McClendon was not satisfied to merely grow the company through leverage – he was the true personification of the cowboy wildcatter, taking personal stakes in every well that the company drilled, through a very unique structure then called the “founders well participation program” (FWPP). With self-appointed board members approving huge salaries and bonuses, McClendon further leveraged outside loans to reinvest in Chesapeake wells, using his own shares as collateral.

The fall of natural gas prices and Chesapeake stock in 2008 forced huge margin calls on the CEO – forcing a distressed sale of most of his 31.5 million share stake in the company.

But instead of being humbled by this setback, McClendon only resolved to double down on natural gas and Chesapeake, using the company as a personal bank. Personal items including art (and a famous globe) were sold to the company at huge premiums, extra bonuses were awarded and private personal loans from already invested Chesapeake capital firms were disclosed. Ultimately, all of these excesses were too much for the company to bear, and he was forced from the company.

None of this seemed capable of slowing McClendon down. He was one of those larger than life oil characters, with his 20 percent stake in the OKC Thunder, a penchant for $3000 bottles of wine to accompany business lunches and photo ops with his niece Kate Upton.

After leaving the company, he confirmed the confidence of his swagger by being able to almost immediately raise $15b in his new oil and gas enterprise, American Energy Partners in 2013. But since that time, everything came off the rails for McClendon. Investments by AEP are estimated to be down more than 50%. While no one has direct information, it would be in keeping with McClendon’s character that a large personal leveraged investment was in that company as well. He saw Chesapeake shares trade as low as $1.50 after leading the shares to a high of over $60 in 2008. Several of his finance partners had balked at recent further loans. Finally, there was the indictment for bid rigging in Oklahoma – and almost certain jail time.

No one can know what was in McClendon’s mind on Wednesday, but it seems clear that the pressure of all of these things was personally insurmountable.

Much of the praise for the widespread use of fracking to increase supply and drop prices in both oil and gas should be given to this great American entrepreneur. But also much of the excess use of leverage and debt that has sunk the industry to the verge of bankruptcy is McClendon’s legacy to bear as well.

It’s as if the entire independent U.S. oil and gas industry has been headed for a concrete embankment at 80 miles per hour for a long time now. Aubrey McClendon, maybe the greatest wildcatter we’ve ever seen, was merely the one to hit the wall first. By Dan Dicker, Oil & Energy Insider

39 comments for “Aubrey McClendon’s Legacy”

We will never know if his accident was deliberate or not. I feel bad for his family and friends.

Achilles4756

Mar 6, 2016 at 4:14 am

Never know……..his death could be a spoof…….and could be way down underneath the Denver airport drinking wine with Kenny-Boy…..

walter map

Mar 4, 2016 at 5:06 pm

“Much of the praise for the widespread use of fracking to increase supply and drop prices in both oil and gas should be given to this great American entrepreneur.”

I don’t think this kind of sarcasm is appropriate here.

Jim

Mar 4, 2016 at 5:18 pm

The guy was a scam artist, and on the political front, one of the outright liars behind the “Swift Boating” of John Kerry. Whatever one thinks of Kerry’s politics (I don’t think much), he had a real military history in Vietnam, unlike Aubrey McClendon’s favorite candidate, the awol/deserter G.W. Bush.
Oh, yeah – then there’s McClendon’s role in swiping the SuperSonics basketball team from Seattle.

The man will not be missed.

walter map

Mar 4, 2016 at 6:17 pm

Apparently Mr. Dicker was not one of McClendon’s many victims and does not live in Oklahoma.

I do think it’s extraordinary that McClendon was able to raise so much money after having demonstrated himself to be such a catastrophic business risk.

Anonymous

Mar 4, 2016 at 8:01 pm

About as extraordinary as a certain candidate for political office who has demonstrated how many of his 351 companies are failing or have failed is now top contender to pull the economy out of a major slump.

Chicken

Mar 4, 2016 at 9:17 pm

The major economic slump was a choice, we need to clean house.

CENTURION

Mar 4, 2016 at 6:27 pm

Like it or not, we need men like him. They risk it all to make things happen. We, the meek, afraid, shy and unimaginative don’t create the oil business, the steel business, the railroad, computer, electrical, etc. etc. businesses. Men like him do.

Sure, they flame out and most of these guys are never heard of again. But, we need them. Because of him there is a “new” oil business called fracking, shale oil fracking, etc.

I don’t insult him. I thank him.

Toddy

Mar 4, 2016 at 8:04 pm

In a capitalist mindset I agree with this. But some business models are simply immoral. That includes anything that devastates the ecology for profit.

roddy6667

Mar 4, 2016 at 10:11 pm

“They risk it all to make it happen” He borrowed a lot of money and then risked other people’s money. That’s what he did. Now they will never get paid back.

d

Mar 5, 2016 at 8:08 am

Henry ford went bankrupt 3 times, for the same reason, gross incompetent, financial mismanagement, in the 21St century he would be a financial criminal.

When they get it wright, the takers take at every step. And everybody gains.

When they get it wrong, it goes very wrong, and the takers kick, and take more. And some imprudent investors/speculators loose.

Without People like Mcclendo, Ford, Rockefeller, JP Morgan, and their kind back in History, Humanity would probably still be in the dark ages.

Those like walter map, need to learn 1 of several Basics.

Thou shalt not speak ill of the dead.

The exception’s being Pedophiles, and genocidal Maniacs like, Stalin, Mao, and Himmler..

walter map

Mar 5, 2016 at 3:04 pm

“Those like walter map, need to learn 1 of several Basics. Thou shalt not speak ill of the dead. The exception’s being . . . ”

Those like “d” need to be more careful about concealing their hypocrises.

Those like McClendon will be the undoing of civilization. I feel no compunction whatsoever for vilifying them for their evils, dead or alive.

d

Mar 6, 2016 at 3:00 am

Debt jubilee, Socalist takers, will be the undoing of this incarnation of civilization. Just as they destroyed all the major civilizations in History.

Risk taker’s are a necessary part of Human Evolution..

Nicko

Mar 5, 2016 at 8:56 am

Quite a craven mindset, indicative of the times I suppose. There are innovators out there who have integrity, no need to praise self-destructive sociopaths.

Tyler

Mar 7, 2016 at 8:12 pm

But you are are wrong headed fool.

Paulo

Mar 4, 2016 at 6:33 pm

Good Riddance. Now, if crooked banksters only had the same courage and determination to make their wrongs right, 2016 might be a good year, after all.

It’s one thing to run a private company like a fiefdom, it’s all together different to use shareholder investments like a private piggy bank. There are faces of real people who buy shares of companies. They put their money down in the hopes of an honest return. It looks to me like the only difference between McClendon and Madoff is scale and consequences. Terms like ‘wildcatter’ lend an excuse to outright thievery.

Chhelo

Mar 4, 2016 at 6:34 pm

Sad story of greed gone bad! Due to moral break down in business activities and government cronyism the hard working core of America have been fleeced to the point of failure.

May God hand out the punishment they all deserve for their crimes.

Toddy

Mar 4, 2016 at 8:07 pm

The definition of greed includes selfish, which in its own definition excludes anyone else’s implications.

Philosophically speaking, you can argue that this means greed is inherently bad because it occurs definitively at the expense of others.

Ptb

Mar 4, 2016 at 6:36 pm

Normally this would be sad, but Rarely do we see honor like this in our system. Makes me think it was not self inflicted.

d

Mar 5, 2016 at 8:33 am

Tidys up a lot of loose ends, and staves off a lot of trouble, for a lot of people.

He would have been well insured, and most of his existing debt will have death cover on it.

No court cases for his family to sit through, and always the, maybe it was an accident angle.

Nicko

Mar 5, 2016 at 8:58 am

Also saved Federal prosecutors and tax payers the several million dollars a trial would have cost.

walter map

Mar 4, 2016 at 6:59 pm

Ouch.

‘According to Arthur Berman, a respected energy consultant in Texas who has spent years studying the industry, Chesapeake and its lesser competitors resemble a Ponzi scheme, overhyping the promise of shale gas in an effort to recoup their huge investments in leases and drilling. When the wells don’t pay off, the firms wind up scrambling to mask their financial troubles with convoluted off-book accounting methods. “This is an industry that is caught in the grip of magical thinking,” Berman says.’

Walter, guess what: the same thing at a global scale is happening with ZIRP and NIRP.

It’s gonna be a roller coaster for a while.

ALBERT CHAMPION

Mar 4, 2016 at 7:30 pm

So, the indictment identified McClendon as part of a conspiracy. Yet, the other conspirators seem to have gone unidentified. What is that about?

Was McClendon conspiring with Anadarko? Exxon-Mobil?

Who were[are] the co-conspirators?

Also of interest is that McClendon was a member of the Kerr family. The Kerr family[Senator Robert Kerr was the paterfamilias] was part of a political, organized crime entity. They controlled Oklahoma as LBJ[and the the Bushies] controlled Texas.

Also of interest, as a rule, vehicles do not incinerate in a front-end collision. I would say that there had to be an accelerant other than gasoline.

In fact, it could well be the case that McClendon was the victim of a vehicular computer system “hacking” similar to what happened to Michael Hastings. And that there was some form of pyrotechnic device fitted to the vehicle.

I say this because the “Onstar” system is unusually transparent to “hacking”.

If I were looking for a culprit, I would be wanting to know all the other conspirators. Wouldn’t you?

night-train

Mar 5, 2016 at 5:22 am

AC: I read that Mr. McClendon was getting involved is some deals in Mexico around the privatization of Pemex. I imagine it would be rather east to step on some very dangerous toes in that theater. One could easily cross people who aren’t prone to litigation, but more often liquidation with extreme prejudice. Not meaning to add to conspiracy theories, as I don’t usually see much credibility in them. Just an inquiring mind wishing to know more.

d

Mar 5, 2016 at 8:53 am

As for Chesapeake itself, its spokesman Gordon Pennoyer said the company was cooperating with prosecutors and received immunity from the Justice Department that shields companies from criminal prosecution if they’re the first to report an antitrust violation, according to Bloomberg Business. This raises the question of whether Chesapeake had turned in McClendon, the company’s own founder, to the federal government.

Chesapeake is in trouble what say they are going to claim he set them up to OVERPAY for the leases. Which is the reason they are in trouble Etc Etc Etc.

For once in America, the land owners and the workers seem to have got something from an oil/gas boom.

Jungle Jim

Mar 4, 2016 at 7:34 pm

Years ago, I had a position in Chesapeake. It wasn’t gigantic, but it was important to me. What caused me to liquidate it was that McCLendon seemed to go from crisis to crisis to crisis. You never had to wait long for the next one. He was constantly over extended even in good times. Finally, he forced the Board of Directors to buy his personal coin collection at a price the HE set. That was the moment when I realized that he was never going to change. I picked up my money, threw it over my shoulder, and left. I could hear a voice saying “what is going to happen is going to happen period, just be damn sure it doesn’t happen to you.

Merlin

Mar 4, 2016 at 9:20 pm

here’s a portion of another opinion regarding AKM business tactics and the DOJ accusation which was dismissed today. Obtaining leases in a hot O&G play is literally like SPY vs SPy vs SPY. The clear winners are the Landowners!!!! They get paid for simply owning the land even if a dry hole is drilled.

“As someone who competed against both Chesapeake Energy Inc. and the unnamed 2nd company in the “bidding” and purchasing of oil and gas leasehold in Northwest Oklahoma from 2010-2012, I was astonished to read the frivolous drivel that your office (DOJ produced and released as an indictment of Aubrey K. McClendon yesterday. As a matter of full disclosure, I have never met Mr. McClendon, worked for Chesapeake or any other entity run by Mr. McClendon, nor have I ever received any direct compensation or revenue from him or such entity. However, I am quite knowledgeable in the subject matter at hand, and do know your accusations to be absurdly false in their nature.

Chesapeake Energy Inc. with Mr. McClendon at the helm was the most notorious company in the industry for doing the exact opposite of what your misinformed indictment claimed. You could have legitimately interviewed any and every employee of an oil and gas company in the lower 48 that dealt with oil and gas leasing between 2007 & 2012 and every one of them would have told you Chesapeake and Mr. McClendon’s problem was not price fixing, but over paying mineral owners. It appears you chose to believe the opinions of some politicians rather than the facts, and proceeded with your blinders on throughout the process.

In almost every basin that’s ever produced commercial quantities of oil and gas in the lower 48 (and some that hadn’t yet), Mr. McClendon led the charge to aggressively acquire leasehold for horizontal development in a manner in which he was more often than not, the sole reason for prices being driven up for mineral and land owners. Indicting this man for artificially depressing prices is akin to claiming the Cookie Monster has been on a diet all along.

Mr. McClendon was solely responsible for his company paying out tens of billions of dollars in windfall bonuses and royalties to mineral owners who historically had been low balled by the handful of incumbent mom and pop conventional vertical drillers that operated in each county, who had grown accustomed to paying between $5-100/acre and 1/8th royalties on 5 year terms for leases since the beginning of our industry. If a rumor started circulating that Chesapeake might be interested in purchasing leasehold in a county, lease prices often surged by 200-300% within weeks. I saw this first hand from speaking and negotiating with mineral owners in four counties in NW Louisiana, two counties in Southeast Colorado, three counties in Northwest Oklahoma and three counties in Southern Kansas over the last 9 years.

The conclusions reached by your ludicrous indictment proves that your entire office either lacks the most elementary understanding of the oil and gas industry and the legal/financial implications of an oil and gas lease, OR lacks the smallest morsel of moral aptitude and conscious. I speculate that it’s a heavy dose of both, but I’m sure you were comforted by a nice pat on the back for falling in line and conducting this political witch hunt that was handed down to you by your superiors.

The most pressing issue at hand is that the specific claims in your release defy the reality of why a mineral owner would sign an oil and gas lease. First of all, there’s no formal bidding process for acquiring and oil and gas lease from an individual mineral owner and therefore is absolutely never a legally binding timeline in which someone has to make a decision to sign a lease at certain prices or be forced to take the highest offer being bid that day, week, month year or decade. So your claims that somehow Mr. McClendon, who lead Chesapeake through the acquisition of over 14 million acres of leasehold in this time frame, was capable of micromanaging individual lease negotiations across an entire play that consisted of tens of thousands of leases being filed every year is beyond laughable. And to have orchestrated a conspiracy in which Chesapeake and another company (clearly Sandridge) would have been able to shelter these mineral owners from speaking to other companies in order to obtain lease prices for under what some of the other groups in the area were leasing for is borderline insane.

Which leads me to your next far fetched assumption, that over a 3 million acre play that spanned 7 counties in Oklahoma, there were only two companies capable of bidding on and creating a market for oil and gas leases. Maybe someday UNICEF will get into the business of making idiotic claims based off of moronic assumptions, but until then, I think the DOJ is my guy. A quick search of the smallest geographic county in the play in Northwest Oklahoma (Alfalfa), shows that no less than 74 separate entities purchased and filed leases in the county over the time frame that you’ve alleged (see attached). There were certainly more companies that offered bids to lease certain mineral owners, but who’s offer was lower than this “artificially” low price you claim CHK induced on the market and therefore weren’t able to purchase anything. I’ll offer myself as an example as someone that bid on over 25 leases in Alfalfa but ultimately wasn’t able to find anyone to lease to me at the terms I was offering. Their main reasoning? CHK and others had already offered them better terms that they were either going to accept or more commonly, they were going to hold out for better terms.”

night-train

Mar 5, 2016 at 5:13 am

Merlin: As I thought about the information put forth by DOJ after the indictment, I too had problems squaring the circle as to how the scheme worked. I concluded that there must have been more to the story than we were being told. So many ways to structure joint ventures in the O&G industry, it appears to me that one would have to get way out into the weeds to violate the law.

When I first heard the lease bonuses being paid in shale plays, often what we called goat pasture in the industry, I had to make some calls to verify what I had heard. Then I had some landowners call me for advice and I was literally astounded at the unusually high bonuses being offered. In conventional O&G, I typically suggest one ask for less signing bonus and higher royalty payments. In good conventional wells, the real money is usually in the production and a bigger piece of that over the life of the well is the best business choice. So the shale model being presented seemed upside down to me. I certainly didn’t see any low-balling. I was perplexed as to how the shale industry was going to be profitable, but I thought someone had an angle that I had missed. When the drilling boom hit in natural gas shale wells, I did predict a gas bubble. As it happened we got a Ponzi Scheme that produced a tangible benefit for workers and ultimately for consumers, at least for a while.

I’m not an advocate for the Motherfracker McCLendon. He was reckless and no doubt involved in some shady stuff. I am just not sure we will ever know the full story.

Kevin Beck

Mar 5, 2016 at 9:46 am

After I read about the indictment, my first reaction was to laugh. I laughed at the stupidity of filing a lawsuit against someone that was willing to pay more than expected for leasing land while at the same time they alleged that he was rigging bids against those same land-owners.

It this indictment had been filed for the benefit of the shareholders of Chesapeake Energy, then I could see some logic. But to use the government as a bully against someone spending corporate money? That’s usually what the board of directors if for!

But I guess no one can ever go broken underestimating the intelligence of the typical Washington bureaucrat. Or DOJ lawyer, either.

RDE

Mar 5, 2016 at 10:51 am

Merlin,
Thanks for the insider viewpoint, no doubt fact based. But it only is significant if the business model for Chesapeake was to produce NG in a profitable, and might I add sustainable and environmentally sound manner. None of which characterize the industry.

In fact Chesapeake operated as a real estate scam and Ponzi scheme. When you are operating a Ponzi, the cost you pay for the fake assets underneath the moving smoke screen is irrelevant. Cash flow and how much you can skim off of it and hide is the only measure of success.

In the end McClendon did us all a favor by showing us the proper exit move for a career like his. Would that the world’s Banksters follow his example.

Chicken

Mar 4, 2016 at 9:32 pm

Pretty sure the guy was a thief. What were the financial watchdogs doing?

Merlin

Mar 4, 2016 at 9:36 pm

there are no watchdogs anymore, just wall street lapdogs for the TBTF banking cartels.

polecat

Mar 5, 2016 at 1:22 pm

ahem….cough ‘watchpigs’ cough……

nick kelly

Mar 5, 2016 at 7:28 pm

Very interesting posts- this site is such a relief after the drivel and conspiracy theories on main stream.
Next question: as this whole fracking thing unwinds, which banks are going to be in trouble. As someone on this site has pointed out ( apart from me) the ‘assets’ of the frackers, (ex. the equipment which will get maybe 10 cents on the dollar) are worthless. There is nothing for the banks to recover.

Banks are somewhat exposed. But they have shuffled off most of the risks to bondholders. It goes like this:

Driller goes to bank, pledges reserves as collateral, gets $600 million term loan and $400 million revolving line of credit. Driller invests this money in exploration and production work. When the money is nearly gone, bank tells driller to issue unsecured (!!!) bonds for $1.2 billion and pay off the loans first. Driller issues $1.2 billion bonds, uses the proceeds to pay off the $600 million term loan, pay the revolver down to 0, and use the remainder for “general corporate purposes,” such as bonuses. Then driller goes back to bank. Bank loves driller because loans got paid off and because driller is coming back for more. Pledging same collateral, driller gets another $600 term loan and starts running up the revolver again.

Bank still has collateral. Bondholders have unsecured notes (essentially nothing), or maybe second lien notes.

After five rounds of this, driller still owes bank less than $1 billion but owes bondholders $6 billion.

Bank can still lose a ton. Their collateral isn’t nearly worth what it was when it was pledged. But at the time, they might have require $1.5 billion in collateral for a $1 billion loan. So in a fire sale, if collateral is worth 20 cents on the dollar, the bank would get $300 million against a $1 billion loan. It would also get equity in the company taken from existing stockholders. Secured bondholders have a similar deal. Unsecured bondholders would be out $6 billion.

This is the method with which banks have pushed the risk to bondholders. See Chesapeake.

walter map

Mar 6, 2016 at 3:57 pm

“Debt jubilee, Socalist takers, will be the undoing of this incarnation of civilization. Just as they destroyed all the major civilizations in History.”

A lie. An outright lie, issued by an outright liar, like a hallucinating Randian psychopath, impervious to facts.

“Risk taker’s are a necessary part of Human Evolution..”

Gamble with your own life, risk-taker. That way we bury one instead of millions.

d

Mar 7, 2016 at 1:51 am

Not only are you an unrealistic taker.

With no respect for the dead.

You are a flat Earther.

You are also a Luddite.

And a very unpleasant one at that, if you could get away with it, you would claim witches, and burn them in the street. Today.

You would make a good fundamentalist muslim, you are definitely, a part of the worlds problem.